SanDisk: More Than Flash

Fred Hager takes a very focused and
thorough approach, providing in-depth research on a select few technology
stocks. Here, Hager and analyst Rick Currin explain the market
for non-volatile flash memory and the outlook for industry leader,
SanDisk.

SanDisk

(SNDK NASDAQ)
is involved in the market for NAND flash memory, a form of non-volatile memory
well suited to mobile devices. Non-volatile means that unlike DRAM found in
PC's which requires power to refresh the memory, the memory of NAND remains
stored without power present. This makes the memory format suitable for
portable devices as well as for transport from device to device similar to those
little 1.44 MB floppy disks headed for the technology museum. Many of you are
already familiar with the removable memory cards used to store digital camera
images and might actually have one or more of these NAND flash cards
already. To a great extent, the proliferation of digital cameras is the
main driver of the massive surge in NAND flash market. However NAND is also
used as digital storage for MP3 players, cell phones, PDAs, and USB device
storage.

"Although SanDisk has forecast strong earnings growth for 2004, the stock has pulled
back on market concern that price pressure in the NAND flash market
will dampen the company's outlook. In our view the price and capacity issues of
the NAND flash market are not accurately represented with these commodity product
concerns. We believe the situation presents a compelling opportunity for investors
to take advantage of the latest pullback in the stock. The concern the market
has is that while SanDisk is a leader in the market, new NAND flash entrants
will erode SanDisk's price and share. To some extent that effect is present
as DRAM makers have decided to wade into the lucrative NAND market. However,
we believe the risk is exaggerated.

"Indeed, SanDisk welcomes price declines of NAND flash as a path to widespread
adoption. This is actually a goal of the company to foster continuing high
demand and universal adoption of NAND flash as removable storage. An example
of price decline leading to demand is the MP3 solution. The pricier MP3 models
utilize a high capacity hard disk, while the NAND flash storage is
utilized in other models. SanDisk believes the higher density removable media will
drive adoption of NAND. For example with low-priced removable media on a USB key chain
holder, friends can share USB keys to share songs in much the same way friends
swap video games. It's harder to do that with a hard disk. Similarly,
lower priced NAND for cell phones is one of the company's aggressive pursuits. This
is a wide open growth market for advanced feature cell phones capable of
video, picture taking, and 3G wireless feature sets. The company recently unveiled
a proprietary T-flash for cell phones.

"SanDisk has a
strong intellectual property position. The company already counts as licensees Intel,
Samsung, Toshiba, Lexar, and Sony among others. Licensing revenues also bring high
margins. The more adoption there is of NAND in the marketplace, the more
expansive the high margin component of SanDisk's business becomes. We believe
the disconnect between the company's optimistic outlook and the recent decline
in the stock are a buying opportunity."